Graduating with a Degree in Debt

The institution at which I teach is located in an economically depressed region of eastern North Carolina. A good number of my students come from families that in the best of times just manage to scrape by each month, though the past few years really haven’t been the best of times. Some of them aren’t even that lucky, and consistently face much worse economic constraints. Simply put, many of my students are, by any reasonable measure, poor or just above the poverty line. If they had to rely on their own resources, they would in all likelihood never be able to gain a higher education.

That’s where student loans come in. The federal government began guaranteeing student loans offered through non-profit and private lenders as part of the Higher Education Act of 1965 (HEA). A component of President Lyndon Johnson’s Great Society domestic agenda that was aimed at strengthening the resources of colleges and universities, the legislation increased federal funding for higher education and made available various forms of financial assistance for students, including low-interest student loans. As Johnson noted upon its signing, the HEA would allow “a high school senior anywhere in this great land of ours [to] apply to any college or any university in any of the fifty states and not be turned away because his family is poor.” Johnson hoped the legislation would level the playing field, providing to those without means a way “to deeper personal fulfillment, greater personal productivity, and increased personal reward.” And as a bonus, a more educated citizenry would “allow us to maintain our freedom in a highly competitive world.”

Although in 2010 the federal government stopped guaranteeing loans issued by private and non-profit lenders and instead became the direct lender for all government-backed student loans, the logic and intent remain the same: Put a college education in reach for those who don’t have the money to pay for it out of pocket. Many of my students fall into this category, though they aren’t alone. About two-thirds of students enrolled in four-year colleges and universities nationwide take on student loans to help pay for their education.

It’s fair to say that many students wouldn’t be able to attend college at all without easy access to loans. But that so many students have to borrow has much to do with the cost of attending. Although the figures vary, over the past thirty years the real cost of attending a four-year institution has at least tripled, far outpacing inflation. Increasing tuition prices means that grants and scholarships don’t go as far as they used to. Combine that with family income levels, which have been stagnant since the 1970s, and it’s no surprise that the average student now graduates college with $29,400 of debt; 38 million individuals now hold a combined total of more than $1 trillion in student loan debt. That’s four times what it was ten years ago, and it surpasses total U.S. credit card debt. In fact, when it comes to what Americans owe, student loan debt is second only to mortgage debt.

Prior to 1976, student loans could be discharged through bankruptcy relatively easily. The establishment of the U.S. Bankruptcy Code in 1978 placed limitations on the ability to discharge student loan debt, and over time the law has evolved and narrowed. Currently, most student loans in most circumstances are excepted from discharge. The Federal Student Aid office of the U.S. Department of Education notes that the discharge of student loans through bankruptcy happens only “in rare cases.” In those cases, the borrower at the very least must demonstrate that he or she has made a good-faith effort, usually for a minimum of five years, to repay the loan but that continued repayment would mean an inability to maintain a minimal standard of living over a significant portion of the repayment period. Few make it this far, which partly explains why at least 10 percent of recent borrowers are currently in default, the highest rate in almost twenty years.

When confronted with such facts, politicians, the media, business leaders, and the student loan industry typically respond by stressing the importance of individual responsibility in borrowing. True, we might hear halfhearted calls to rein in the cost of tuition, but more common are scolding reminders about how planning in advance, say, with college savings accounts; how choosing an affordable school; how working part time; and how good old-fashioned belt-tightening can help one avoid a mountain of debt after graduation. Jack Remondi, the CEO of Sallie Mae, the nation’s largest servicer of federally backed loans and provider of private loans, has said that unmanageable student loan debt is largely the result of “poor planning.” Over-borrowing can be avoided, Remondi has emphasized, by putting in place a “plan that takes into consideration what your income potential is going to be when you graduate and what that debt burden is going to be.” In other words, the sticker price of a college education and the necessity of going into debt to afford it are largely assumed as given. Lacking any real alternative, so the thinking goes, it’s up to the borrower and the borrower’s parents to come up with a long-term strategy (.pdf) for managing the unavoidable debt that comes with higher education.

My students, who sometimes graduate with double the average debt, aren’t necessarily poor planners or irresponsible borrowers, misinformed about the debt they are taking on to finance their college education. They just come from homes that couldn’t afford to put money into a college savings account. They’ve chosen for various reasons to attend a college that is one of the more reasonable options in the state, but still costs $17,300 a year for tuition alone. They already have part-time jobs, but $7.25 an hour, which is the current minimum wage in North Carolina, doesn’t make much of a dent in current tuition rates. They know what it means to tighten their belts, since they’ve done so all their lives. My students are, in other words, painfully aware of the amount of debt they are taking on and the consequences: numerous years of sacrifice in other areas of their lives to repay with interest the cost of their degree. One of my current students has told me that she understands what it means to be “indebted for life.”

Another student of mine, who graduated last spring (I’ll call her Jackie), grew up in a single-parent household, whose income averaged about $21,000 a year. She relied on student loans to fund her education, but during her last year-and-a-half of enrollment she also worked thirty to forty hours a week, while taking a full course load. Degree earned, Jackie owes $45,000 in student loan debt. She hasn’t been able to find a stable, well-paying job, so she works as a server in a restaurant, which doesn’t pay much. After her student loan payment, rent, bills, and groceries last month, she had $1.87 left. Her car is on its last legs, but she can’t afford a new one. Nor can she afford much else. She’d like to go to graduate school to better her financial prospects, but she doesn’t see how that is possible, given her current situation.

Another student of mine told me: “I am in the position where I have to take out loans in order to go to college. Period. I have no other option.” In a cruel twist, the very means undertaken by my students to get themselves out of poverty threaten to continue that poverty through the debt that they now owe. The massive amounts of debt that Jackie and many of my other students have to take on have little to do with “poor planning.” They haven’t been able to plan at all, which is part of what it means to be poor.

STUDENTS LIKE JACKIE, and so many others, are in a bind. They’ve been told over and over that the safest, most reliable way to guarantee a secure, well-paying job is to get a college education. Teachers, parents, ministers, elected officials, business leaders—all constantly reinforce the notion that higher education is critical for ensuring one’s earning potential and overall happiness. It’s how President Johnson framed the HEA, and it’s become an article of faith across every level of private and public discourse.

The message isn’t really wrong, at least given current social and economic considerations and constraints. It’s difficult to measure happiness, of course, but it remains the case that on average those with a bachelor’s degree make at least 50 percent more than those with only a high-school diploma. That wage gap will likely increase as, we are regularly told, the economy increasingly requires more educated, highly skilled workers. The message is clear: get a college degree, or face a lifetime of precarious and meaningless low-wage work.

There’s a larger imperative as well, tied to the strength of the nation as a whole. As President Obama has said: “The kinds of opportunities that are open to you will be determined by how far you go in school. In other words, the farther you go in school, the farther you’ll go in life. And at a time when other countries are competing with us like never before, when students around the world are working harder than ever, your success in school will also help determine America’s success in the twenty-first century.”

But such rhetoric rings hollow alongside lectures about individual responsibility, which moralize an economic problem. Moreover, the shifting of responsibility onto the individual borrower conceals the fact that student loan debt is, in one way or another, a highly profitable business. The Congressional Budget Office has estimated that the federal government stands to make $175 billion in profit from student loans over the next decade, and profits for loan servicers and lenders have continued to rise. Investors and speculators are also in on the action, as student loans debts, like risky mortgages, are bundled and sold as securities in financial markets. For instance, in 2012 Sallie Mae sold $13.8 billion worth of such securities. Though a far cry from the trillions of dollars of mortgage-backed securities that ultimately tanked the global economy in 2007 and 2008, The Wall Street Journal has reported that investors want more, with demand as much as fifteen times greater than supply. That supply will likely increase as student loan servicers and issuers seek to leverage new capital for hungry investors.

This doesn’t even take into account all the other industries that benefit indirectly from student loan debt, such as test-prep companies, textbook publishers and suppliers, and technology servicers and providers. Then there are the schools themselves. The simple fact is that many institutions would likely cease to exist, at least in their current forms, without the reality of student debt. My own institution would probably fold within a year or two if our students didn’t have access to debt.

In this sense, the system functions similarly to our current healthcare system: it’s a complicated market composed of numerous actors that operate at various levels to sell a product that individuals in some sense have to consume. Opting out of either system isn’t really much of an option, and individuals will go to great lengths, including taking on exorbitant debt, to use the services both provide, because both have direct impacts on livelihood. All the while, those who run the systems profit from our needs and desires.

As a business strategy, however, it’s shortsighted. Although student debt is certainly profitable, there’s good reason to think that it may negatively affect the economy in the long term. Money spent on repayment is money that can’t be spent elsewhere, and large amounts of individual debt may limit the ability to participate in some of the very activities that drive the economy, such as homeownership. Moreover, excessive student debt often forces individuals to play it safe, rather than take the risks that entrepreneurship—another key driver of economic growth—requires. High monthly student loan payments mandate a reliable income, and leave little place for the unpredictability and insecurity that initially accompany true innovation. The potential overall drain on the economy explains why the Education Department has begun a more serious effort to inform borrowers of their repayment options, such as the income-based repayment plan. The latter ties monthly payments to income, which lowers monthly payments. But it does so at the expense of extending the life of the loan, meaning that the total amount owed increases. Such strategies may provide short-term relief, but they don’t seem to be long-term solutions to a worsening problem.

It’s bad enough that a college education is so expensive. But the toll exacted by the extra burden of excessive student debt, especially on those already poor, threatens the common good such an education is meant to preserve—and nourish. If our educational system is ever to be just, we must find an alternative to the current system, which through the debt it creates often increases the burden of the least of these.

Notice that soon after the U.S. government made money available to college students, the cost of education rose dramatically. As the government makes money available in ANY program, costs rise.

The author offers no insights as to why costs have risen dramatically. I'm confident that Catholic universties have kept pace. Why not ask them the reason for more inflation than the healthcare industry? I would guess more students go to college than ever before. Evidenly, LBJ's program work. Is demand driving up the price of a scarce resource?

Gosh, I am surprised the author did not present a case for loan forgiveness. Arghh!

Some of the primary reasons students have to borrow more include the following: state funding of public colleges and universities has dropped considerably, and most of not all universities, both public and private, have expanded their executive staffs. University presidents receive salaries on a par with corporate executives, while the number of tenured professors drop and the number of adjuncts, who receive no tenure or benefits, increases. Students have to borrow more money primarily to cover the cost of tuition and books, and that money doesn't go to profs, it goes to the administrators and paying for expansion of university amenities.

The general statement that college graduates earn more than high school grads is well documented, but there are many exceptions to the rule, especially today. One example: colleges and universities in Pennsylvania have produced 12,000 new certified teachers every year for the past decade. Yet the number of teacher positions opening up in Pennsylvania due to retirements, resignations, etc., is about 3,500 per year. I suspect that many other states have similar imbalances. So, a lot of graduates with Education degrees cannot find work in their chosen profession, and end up repaying student loans out of their wages as restaurant workers, where they compete with thousands of Hospitality Management grads.

Meanwhile, those with degrees in engineering or the physical sciences and math are in demand (too few grads for the jobs that need filling), which assures very decent starting salaries and advancement opportunities.

I wonder if high school guidance counselors might be able to encourage more students, early in their high school years, to at least get the math and science courses that would position them to pursue these degrees in college, and talk about supply/demand and starting salaries in different professions.

Its been a long time since I had to take out student loans and my own children aren't college age yet, but one current repayment option looks pretty interesting: if college graduates get jobs in government or the nonprofit sector, after 10 years, any outstanding balance is forgiven I believe. And if the student opts for one of the lower repayment options, like the income-based one, that might add up to a fair amount of money forgiven.

I really like the idea of incentivizing talented young people to enter and continue to work in public service careers.

But what happens to the students who go through college counting on employment in government or non-profit work, only to find at graduation that there are far more graduates seeking those positions than there are positions to be filled, as is the case with teachers in Pennsylvania, as above?